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Monday, September 14, 2015

Banks and the Clustering of Mergers and Acquisitions Activity

Industry structural changes are a major M&A catalyst.
The changes inhibit incumbent firms’ ability to create shareholder value. This
is reflected in the current clustering
of M&A activity in the healthcare, technology and oil and gas industries.
Banking has also seen increased activity in the number of deals. The deals have
been primarily in the smaller community and regional bank segments. Hence,
dollar volume is still off pre crisis levels. Larger Too-Big-To-Fail banks are
still reluctant to seek regulatory approval. Nonetheless, banking has
structurally changed since the financial crisis as reflected in weaker
operating performance. Many bank, however, have yet to adjust to the changes.

This is reflected in lower economic returns, ROE less cost
of equity, and consequently lower pricing multiples like price to book. Pricing multiples reflect underlying operating
performance. Pressure is building, primarily from activists, to improve
returns. Banks who “get it” will enjoy improved returns and values e.g. Warren
Buffet’s favorite bank Wells Fargo. They will likely force changes upon weaker
banks that “don’t get it” like Bank of America which trades below book value.
This will spur increased banking M&A-initially smaller transactions until a
larger deal is pushed thru the regulatory log jam. My thoughts on this matter
are outlined in my
attached American Banker BankThink comment.

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About MergerProf

In addition to their day jobs, Joe and Ralph teach acquisition finance at the Amsterdam Institute of Finance. This blog was created in the summer of 2012 as a tool for those interested in acquisition finance and related material. Admittedly, we define related material broadly to include mergers, private equity, banking, governance, deal making and, well, finance in general. We hope you will enjoy and contribute, critiquing, expanding and providing your own examples related to the posts. We encourage you to join us in this adventure and, for some of you, to see you in Amsterdam, New York or Philadelphia.